Question of the week: When should we release our loan and other contingencies from our purchase contract?
For new buyers, or those entering the market in the future, as part of your offer to purchase a new home you will ask the seller to provide you the opportunity to cancel the transaction and have your deposit returned if certain contingencies are not met. The big three for most transactions are your offer is contingent upon your obtaining loan approval, contingent upon the appraisal report having sufficient value and conditions for the transaction, and contingent upon your having the property inspected by someone of your choice for defects and/or material issues with the structure(s) and property that will or may cause costs to repair, remediate or cure in the future. The boiler-plate purchase contract used in almost all residential purchase transactions from the California Association of Realtors has a default 17 days for these contingencies to be met, by which time the buyer is to either remove the contingencies or issue notice to cancel—at which point the seller may agree to re-negotiate the transaction to preserve the deal; this usually happens due to a low appraisal or items discovered by the professional home inspector that need repair, replacement, etc.
It is the policy of our company to never tell a buyer to release their contingencies, especially the contingency for receiving loan approval. This is sound legal advice we have received and follow based on the many factors that may happen after a contingency is released that may prevent complete and final loan approval thereby putting Stratis Financial is potential jeopardy for any deposits or other costs for our client if we indicated they could remove the contingency.
This is a bit of a sticky subject, especially with the several hundred real estate professionals who read the Weekly Rate & Market Update. For every transaction when we get to the seventeen day mark in the transaction we are contacted by the buyer’s agent, and not infrequently the seller’s, asking if the buyer can remove the loan contingency. What is our response?
Our response depends on where we are in the process. First, let’s address the arbitrary seventeen day contingency period for loan contingencies. No one in the lending industry is quite sure how the seventeen day period was determined to be the standard for a buyer to have loan approval. The seventeen days is from the date the buyer and seller agree to purchase price and terms and includes weekends and holidays. It is not from the date the buyer makes a formal application, so if they are communicating with several lenders and take a week to submit and application that lender now has ten days by which time they are expected to deliver an approval for the buyer to receive loan approval. The seventeen days does not take into consideration the buyer’s specific lending requirements that may create some delays in obtaining approval, do they have foreign income or funds, are they self-employed with complex tax returns, have they switched jobs, transferred funds between several accounts, do they need to have their credit scores increased, or any one of many other factors that can require more time to process and prepare for underwriting.
Granted these are items the buyer should be aware of and could start working on with their lender prior to writing an offer to minimize risk of losing their deposit once in escrow. There are however other factors that can impact the seventeen day period that many agents either seem not to be aware of or disregard, primarily what is the nature of the market at that time? Is the market extremely hot with very high volumes impacting the flow of files from application, through processing, loan submission and approval? Are there issues with access to the property due to tenants or uncooperative seller or unavailable agent? Are there title issues which the seller may or may not be aware of? We have had all these issues and more pop up in transactions and agent representing the seller or the buyer maintaining the seventeen day period is sacrosanct and they must either release the contingency or cancel the transaction—on more than a few such circumstances I have advised the buyer to cancel the transaction due to delays beyond their control and inevitably the seller, read: the listing agent, has backed down on their demands for contingency removal and extended the contingency period.
What does Stratis Financial reply when asked if the loan contingency can be removed? We reply with the status of the loan at that time: we initiated they file in most cases with Automated Underwriting System (AUS) from Fannie Mae or Freddie Mac and have received all, most or none of the information requested to support the AUS approval. If we have submitted the loan to underwriting we indicate that and if we have not received the initial approval with conditions yet when we expect to receive the approval. If we have received the approval we indicate what the conditions are that are required for final approval and whether any of the conditions create concerns as to ability to complete the approval process. Based on the information we can inform the buyer that we consider the file able to be approved should there be no material change in any of the information we have received.
Are we not saying that they can remove the loan contingency with this information? We are not saying the loan contingency can be removed due to the statement, “no material change.” In the past I have had a buyer lose their job between loan docs being issued and signed, I have had a lender pull a back-up credit report that showed new credit that created an issue with the buyer’s ability to qualify, I have had a buyer presented with a summary judgement altering child support and alimony payments impacting ability to qualify, I have had a buyer have to delay the sale of their home due to his buyer losing half of her down payment in Las Vegas the weekend before closing (one of my favorite stories of all time—worth a beer or other beverage to hear this one).
This does not include the non-buyer related delays I have faced including a death in the property between loan docs and funding, a truck driving through the front door just before loan docs, earthquake delaying all closings until inspections could be made to satisfy lender the property is sound and flooding caused by El Nino.
There are many issues that can impact a real estate transaction any of which can occur between the removal of loan contingencies and closing, many of which are beyond the control of the buyer. In many cases, most actually, as long as the agents and seller are aware of what is happening on the file and the factors involved any delays needing an extension of the contingency period is understood and agreed upon. In most cases, almost all that I have been involved with, buyers have not lost deposits after removing loan contingencies due to cooperation between the parties involved to make the deal work and close. There have been a few cases however, usually because of an unprepared buyer, or one who did not provide all the necessary and material information needed for obtaining loan approval, where a deposit has been lost.
When should your remove your loan contingency? When you feel comfortable based on the information we have provided you as to the status of your loan in the approval process that we will be able to get through underwriting, obtain loan documents and fund your mortgage. Ideally this information can be provided to you during the standard seventeen day contingency period, but not always and if this is the case by keeping the agents informed as to our status through the process we can generally assist with an extension to protect your deposit until you feel secure in releasing your contingency
Have a question? Ask me!
Was there any economic, or other news this week? Yesterday’s Congressional testimony by former FBI Director James Comey has sucked all other news out of most of the national consciousness, not just yesterday and today but starting Monday as the media dedicating their resources waiting for the testimony. As it happens there was no economic news that had any significant impact on rates.
Rates for Friday June 9, 2017: There is plenty of non-economic news that could impact mortgage rates favorably, the circus in Washington, the election results in Great Britain, the ultimatums to Qatar from other Middle Eastern nations. However investors are not making any moves in any markets, as a result rates are flat once again this week from the week prior. There is little on the horizon that should snap rates out of their current range and stability.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.75% Flat
30 year high-balance conforming 3.875% Flat
30 year FHA 3.25% Flat
30 year FHA high-balance 3.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
It looks like a wonderful late spring weekend in Southern California, perfect for gardening and outdoor chores as well as getting some practice in for the summer barbecue season!
Have a great week,